Market update: DXY enjoys a September high

[MongiIG]

September is traditionally the best-performing month of the year for the US dollar index, the DXY, which has recorded an average gain of 1.44% over the past ten years.

 

Source: Bloomberg

 

Forex United States United States dollar Currency U.S. Dollar Index Dollar

 

 Tony Sycamore | Market Analyst, Australia | Publication date: Thursday 07 September 2023 

USD index regains lost ground

After its overnight rally, the DXY is already up 1.187% this September, having regained all the ground it lost into month end and more. The driver of US dollar gains this week has been more of the same: higher US yields and signs of a deepening slowdown in Europe and China, which sparked risk aversion, and weakness in the Japanese yen.

Starting with the former: US yields climbed overnight, following a hotter-than-expected ISM services purchasing managers' index (PMI) that contained worrying signs of pricing and employment pressures.

Defying market expectations for a fall to 52.4, the ISM services PMI rose to 54.5 in August from 52.7 in July, its highest reading since February. The prices paid sub-index increased to 58.9 from 56.8, and the employment component increased to 54.7 from 50.7.

In response to the ISM beat and hawkish comments from European Central Banke (ECB) official Klass Knot, who warned about the possibility of a rate hike from the ECB next week, US two-year yields closed 6bp higher at 5.02%, up 25bp from Friday's low. The probability of a 25bp rate hike in November, which we have flagged in recent weeks as being underpriced, is back up to 44%.

Turning to the slowdown in China and Europe, which continues to see their respective currencies marked lower against the greenback.

Earlier this week, a larger-than-expected drop in the Caixin Services PMI for August (51.8 vs. 53.6 expected) saw USD/CNY trade above the 7.3200 level for the first time in 10 months. A similar story in Europe. The final reading of the Euro Area composite PMI was lower than expected (46.7 vs. 47 expected), sending the EUR/USD test support at 1.0700 for the first time in three months.

Topping it all off for the US dollar index, USD/JPY rallied to a fresh cycle high of 147.87, its highest level in ten months, as yields on Japanese Government Bonds remain anchored around 0.65%, in contrast to the 4.29% on offer in US ten-year notes.

DXY technical analysis

During the first half of 2023, the US dollar index, the DXY, tested and held support at 101.00/80 on three separate occasions before punching lower post-Junes softer-than-expected US inflation data released in mid-July.

As highlighted since late July here, the swift rebound back above 101.00/80 left the mid-July 99.57 low, exposed as a false break lower. For followers of the Elliott Wave, viewed as Wave V low, following the completion of a five-wave impulsive sequence from the 114.78 September high, as viewed on the chart below.

The rally from the 99.57 low to last night’s 105.02 high now has the DXY pressing into overbought territory. Once the current period of DXY strength runs its course, a pullback towards 102.00 is likely into year-end.

However, before that, we can’t rule out the US dollar index, the DXY extending gains towards the March 105.88 high. Keep in mind that the 50% retracement of the five-wave decline from the October 114.78 high to the July 99.57 low is 107.20ish.

In summary, while the rally in the US dollar indexes overbought, we can’t rule out further US dollar strength in September before the big dollar commences a well-earned pullback.

 

 

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